Islamic Finance

98 Islamic Finance in Practice

and there are now various software programmes that have been developed

that can aid in this process. There are differentaccounting-based screens

that are adopted.

The Dow Jones Islamic Index, which is often used as a respected

benchmark, excludes companies whose:

• total debt, divided by trailing 12-month average market capitalization is
  33 per cent, or more;


• cash-plus-interest bearingsecuritiesdividedbytrailing12-monthaverage
  market capitalization is33 per cent, or more; and


• accounts receivables divided by 12-month average market capitalization
  is 33 per cent, or more.

AAOFI has issued Standard No. 21 dealing with financial paper (shares

and bonds), which sets out various parametersinrelationtotheparticipation

or trading of shares in companies whose primary activity is lawful, but

which make deposits or borrow on the basis of interest. The conditions are

that:

• the constitutive documents do not state that one of its objects is to deal in
  interest orharamgoods;


• the aggregate amount of interest bearing debt does not exceed 30 per cent
  of the market capitalization of the company;


• the total amount of interest bearing deposits does not exceed 30 per cent
  of the market capitalization of the total equity; and


• the amount of income generated from a prohibited component does not
  exceed 5 per cent of the totalincome of the corporation.

In determining these percentages, recourse is to be had to the last budget

or verified financial position. In addition, the companies must know that the

use of conventional interest-based financing is prohibited.

There are on-going discussions about refining screening ratios and the

methodology used in calculating the ratios.

The requirement to ensure Shari’a compliance is an ongoing process in

that it is not sufficient that the shares are Shari’a-compliant when they are

first acquired, but must continue to be so compliant. For example, it might

be that the company which issued the shares isShari’a-compliant initially

but then forms a subsidiary that engages in non-Shari’a activity. In this

instance, the security may have to be disposed of or, depending on the level

of non-Shari’a compliance, a relevant amount of dividend payments passed

over to charity.

Mergers and acquisitions

Investment banks routinely are involved in mergers and acquisitions. In

relation to arranging Islamically-compliant financing for use in these